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Wednesday, January 19, 2011

AmResearch maintains buy on SP Setia with Target Price RM7.10

KUALA LUMPUR: AmResearch maintains its BUY rating on SP Setia and raises its fair value from RM6.80 per share to RM7.10 per share based on an unchanged 5% discount to its revised fully diluted (FD) net asset value (NAV) of RM7.46.

“We lifted our FD NAV from RM7.15 to RM7.46 to account for the estimated accretion to assets value from its landbanking deal with the Ministry of Health (MOH). SP Setia has been given the right to develop 40 acres of prime land in Bangsar in return for a new health and research complex on a 55-acre site in Bandar Setia Alam,” said AmResearch

Based on AmResearch's conservative estimated plot ratio of 5 times (x) and an efficiency factor of 70%, the net saleable area is about 6.1msf. Assuming an average selling price of RM1,000psf, the gross development value is about RM6.1bil.

Compared to status quo, AmResearch said this land swap is accretive because the Bangsar site has high development potential and ready end-user demand. And, the relocation of the new research complex would accelerate the maturity of Setia City, the commercial precinct in Setia Alam.

“But the deal fell short of consensus expectations. SP Setia would only have a 50% stake. The joint venture company would also have to distribute 20% of its profits to the MOH,” “SP Setia also spooked the market by announcing a surprise placement of up to 15% (153mil) of its paid-up capital to raise funds for its existing projects and future' expansion,” said AmResearch.

AmResearch said the market would need to digest the immediate dilution risk from the proposed placement and the back-ended accretion to assets value from the land swap. After the sell down yesterday, this trade-off is already being priced-in.

Hence, the risk reward profile is turning more favourable starting from a lower entry point because the fundamental story is intact, we believe. For a start, it is poised to deliver at least RM3bil in sales this year, given maiden contributions from the prolific KL Eco City.

Given a recapitalised balance sheet (post the proposed share placement), SP Setia must again demonstrate its uncanny ability to grow acquisitions.

The litmus test though is how prolific and significant its next land deal is going to drive NAV growth, considering its share capital would have expanded by 15% post the share placement.